As it becomes clearer that the U.S.-China relationship is becoming more fraught and competitive, companies are looking to reduce their risks by using a “China Plus One” strategy of investing more in production in other countries.
The tiny Vietnamese market has long been a winner from efforts to keep costs low as wages have risen in China, but the new shift is broader and offers more ways for investors to benefit. Companies are now seeking to diversify for reasons beyond saving money, as the U.S. and China increasingly view their their relationship through the lens of national security and Russia’s war on Ukraine has showcased the potential economic fallout of relying too much on one country.
A wider array of countries—think India, Mexico, and Indonesia, among others—- could become the “plus one” for companies moving away from China. That will open up an opportunity for investors to gain as manufacturing activity takes off in these countries, as well as from the follow-on bump to their economies as more investment pours in.
Almost a quarter of respondents in an April survey of members of the American Chamber of Commerce in China said they were considering relocating, or working to do so. Another 27% said they had reprioritized their investments in other countries, up 21 percentage points from a survey earlier in the year.
One country vying for that business is India, which lagged behind China in manufacturing growth for decades. It has stepped up incentives such as tax rebates, cut import duties, and is improving infrastructure to woo companies looking for alternatives to China.
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Its position is strong because unlike China, whose working-age population is already declining, India is expected to have more than 240 million people looking for work in the next 20 years. That makes it a natural candidate to gain from the next wave of relocations of low-end manufacturing.
“If we think about the next 10 to 20 years, looking at the policies and factors like labor, a changing trend is under way, and the stars are aligned for a manufacturing shift to India,” Bernstein analyst Venugopal Garre wrote in a recent note.
Analysts also see other Asian countries such as Indonesia—and those in Latin America, especially Mexico—as positioned to become hot destinations.
Mexico’s proximity to the U.S. is one draw but it has other advantages. On a panel discussion at the Milken Institute Global Investment conference this past week, Eugenio Madero, president of Rassini, a producer of suspension components for light commercial vehicles, noted that Mexico boasts the highest engineer graduation rates per capita, more than India.
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The problem is that a broad-based emerging-markets fund may not give investors seeking to take advantage much exposure to those markets. The iShares MSCI Emerging Markets exchange-traded fund (EEM), for example, held less than 2% in Indonesia and just 2.6% in Mexico as of the end of the first quarter. The figure for India was below 14%.
Yet there are funds that would let investors ride the potential coming wave. Barron’s worked with MorningstarDirect to screen its pool of diversified emerging markets funds for those that had a higher allocation to each of these markets than the MSCI Emerging Markets index and had at least a three-year record.
The 10 biggest funds that made the cut included both active and passive investing strategies.
The GQG Partners Emerging Markets Equity Fund (
), run by veteran global manager Rajiv Jain, has one of the largest allocations to India, at 34%, as well as a hefty 6% in Mexico and almost 5% in Indonesia. The fund, which charges an expense ratio of 1.16%, reflects Jain’s wariness about China’s longer-term prospects. He says the country faces structural challenges to its growth, including a shrinking working-age population and Xi Jinping’s tighter grip on the economy, not to mention geopolitical concerns.
Of the group, the Allspring Emerging Markets Equity (
) has the heftiest stake in Mexico, with beverage and retailing giant
(FMX) as its top holding. It has a relatively high expense ratio of 1.36%, according to
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The $8 billion JPMorgan Emerging Markets Equity Fund (
Read More: U.S.-China Friction Is Changing Supply Chains. 10 Funds That Could Benefit.